US manufacturing shrinks for first time in nearly three years as orders plummet

Reuters, NEW YORK

Wed, Jul 04, 2012 - Page 15

US manufacturing shrank last month for the first time in nearly three years as new orders plummeted, according to one measure of the sector that provided a stark sign of the economic recovery’s slowdown.

The Institute for Supply Management (ISM) said on Monday that its index of national factory activity fell to 49.7 from 53.5 the month before, missing expectations of 52.0, according to a Reuters poll of economists, and below even the lowest forecast.

It was the first time since July 2009 that the index has fallen below the 50 mark that separates expansion from contraction. That was shortly after the US economy emerged from recession.

Manufacturing has been one of the drivers of the US economic recovery, which now appears to be losing momentum over fears about the eurozone’s debt crisis, a slowdown in China and uncertainty over domestic fiscal policy.

“Clearly this is the biggest sign yet that the US is catching the slowdown that is well under way in Europe and China,” London-based Capital Economics senior US economist Paul Dales said.

Dales said the report was consistent with an economy that is growing at an annualized rate of a little below 1 percent, after 1.9 percent growth in the first quarter, dismissing talk that the number signaled a new US recession was coming.

A reading below 47 would be consistent with another recession, Dales said.

The ISM report painted a more dour picture of manufacturing than a survey released earlier on Monday from Markit, which showed the sector still grew last month, albeit at its slowest rate in 18 months.

Still, analysts said the ISM report increased the odds the US Federal Reserve would step in with a third round of bond buying — known as quantitative easing, or QE3 — to prop up the economy.

“Both growth and inflation are slowing, which puts the Fed firmly in the game. There is a very good chance of QE3 at the August Fed meeting,” New York-based RBC Capital Markets senior US economist Jacob Oubina said.